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Innovation looks offshore due to changes in Government R&D policy Thursday 12 Jul 2018

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Major Australian innovators are actively looking at relocating their research and development overseas after the continued degradation of the Federal Government’s R&D tax incentive program, and the release of recent draft legislation that adversely impacts larger Australian based multinationals conducting R&D in Australia.

In a recent interview on the subject, Tracey Murray (a Director of Innovation Incentives and IP Economics within Glasshouse Advisory) warned that many mature companies are re-considering their R&D strategy options, due to the latest proposed changes to the R&D tax incentive program which are an active disincentive for Australian multinationals to conduct R&D in Australia.

"With the recent reduction in the program to an 8.5% benefit, we have noticed a significant upswing in queries related to assigning IP to overseas jurisdictions and relocating R&D functions," Ms Murray said when asked the impact of the proposed changes on IP Investment strategies for larger innovators. She indicated that these inquiries have increased significantly with the release of the draft new R&D legislation, which sees a further erosion of R&D benefits available in Australia.

“The proposed changes to the tax incentive program appear to be short-term cost cutting at the expense of the country’s long-term innovation and economic security.”

Under the tiered structure of the proposed R&D changes announced in the Budget, for a company to gain an equivalent 10% benefit (available under the former R&D program) it would need to achieve an R&D intensity of more than 21% - that is, 21% of total expenditure would need to be on eligible R&D.

“It is our view that this will act to drive R&D activities offshore to more R&D friendly jurisdictions and act as a disincentive for some of Australia’s most acknowledged innovators to establish R&D activities in Australia,” Ms Murray said.

To put this in perspective, a recent analysis by Glasshouse Advisory identified that, using 2017 data, only six of the top 25 global innovators would qualify for the top 12.5% R&D benefit proposed by the Federal Government.

“The proposed changes do not appear to align with the government’s stated objectives, which was to restore the integrity of the program and to reward companies that invest in additional R&D activities. Cutting the program by $2 billion over four years and returning that $2 billion to consolidated revenue does not appear to have any relationship to restoring program integrity or rewarding highly innovative companies - it appears as a cost saving measure only,” Ms Murray said.

The proposed changes come at a time when Australia’s business expenditure on research and development activities as a percentage of GDP is dropping. At 1.19%, it is well below the OECD average.

Australia now ranks 23 in the Global Innovation Index, down from previous years.

With the release of the draft legislation on the 29th June 2018, the Federal Government also outlined a public consultation process, details of which can be found at here.

We are encouraging all impacted companies to participate in this consultation process and if you are unsure as to what impact the proposed intensity test will have on your company, please contact your local Glasshouse Advisory R&D Expert.

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